It’s Just a Cup of Coffee – More on Compound Interest

To enable me to regularly save around 60% of my earnings I follow three philosophies within my life. 

Firstly live well within my means.  A simple example that has a big impact is the decision to currently rent for a number of reasons including this and this.  Given that my rental is not my forever home I make some compromises and live in a property that is significantly more modest than what I can afford.  This decision then compounds as by choosing to live in a smaller property heating, lighting and Council Tax bills are also a fraction of what they would be were I to have that larger property.  This adds up to significant savings which are then invested.

Secondly I have opted out of consumerism, do not value image and am not swayed by advertising.  In fact I find that I no longer even notice advertising.  Instead I buy only what I need and when buying I spend the minimum that will give me the quality I desire.  This means I have not purchased an Apple iPad as my old laptop is more than sufficient and still working well even though the battery no longer holds charge.  It also means I do not have an expensive iPhone on an expensive monthly contract as I have decided that I don’t need instant internet gratification at any time of the day or night.  Instead I choose to access the internet as much as I like for a lot less than £10 per month whenever I am at home.  It also means that when I go shopping I buy the cheapest grocery items that will meet my quality needs.  If I want to cook myself a Full English Breakfast on a Sunday morning I’m not too proud to use Tesco Everyday Value Baked Beans at £0.26 for a 420g can versus the nicely marketed Heinz Baked Beans at £0.70 for a slightly smaller 415g can.  All of that frees up yet more cash.

The FTSE 100 Cyclically Adjusted PE Ratio (FTSE 100 CAPE or PE10) – September 2012 Update

This is the Retirement Investing Today monthly update for the FTSE 100 Cyclically Adjusted PE (FTSE 100 CAPE).  Last month’s update can be found here.

As always before we look at the CAPE let us first look at other key FTSE 100 metrics:

• The FTSE 100 Price is currently 5,782 which is a 1.2% above the 01 August 2012 Price of 5,712 and 6.7% above the 01 September 2011 Price of 5,419.
• The FTSE 100 Dividend Yield is currently 3.74% which is a slight rise from the 01 August 2012 yield of 3.71%.
• The FTSE 100 Price to Earnings (P/E) Ratio is currently 11.46 which is up 6.2% since the 01 August 2012 and 32.5% since the 01 September 2011.
• The Price and the P/E Ratio allows us to calculate the FTSE 100 As Reported Earnings (which are the last reported year’s earnings and are made up of the sum of the latest two half years earnings) as 504.  Earnings are continuing to fall while Prices continue to rise.  They are down 4.7% month on month and down 19.5% year on year.

The Miracle of Compound Interest

The saying goes that “money doesn’t buy happiness”.  I firmly agree with this however I think the saying is also a little misleading and should be extended to say “money doesn’t buy you happiness but without a certain amount it’s going to be very difficult to be happy”.  Thankfully, I am not in the situation where I am heavily indebted or worse am heavily indebted and require the booming pay day loan industry to get by.  I can only imagine the pressure and stress that a life like that would put on both an individual and their family.

It is for this reason that I believe a basic level of personal finance should be taught at school.  What good is English, Mathematics, Sciences and the Arts if the earnings potential that those skills bring cannot be harnessed and maximised.  Within the personal finance module it would be compulsory to teach the miracle of Compound Interest.  I can’t help but feel that we would have less indebted people today in the UK if only more people understood how Compound Interest worked.  The sad thing also is that at its most basic form Compound Interest is such a simple concept.  It is nothing more than if you have an initial balance of money which has interest added to that balance, then provided you don’t withdraw that interest, from that moment on that added interest also earns interest.  It is nothing more and nothing less than that.

The S&P 500 Cyclically Adjusted PE (aka S&P 500 or Shiller PE10 or CAPE) – September 2012 Update

Stock markets today provided big rises after Mario Draghi announced that he plans to buy up the debt of his favourite PIGS.  The German DAX rose 2.9%, France’s CAC 40 rose 3.1%, the UK’s FTSE 100 was up 2.1% and the Spanish IBEX was up a large 4.9%.  Positive market responses were not limited to Europe with the US S&P 500 also up 1.9% as I write this post. 

Given these market moves let’s look at the Retirement Investing Today monthly update for the S&P500 Cyclically Adjusted PE (S&P 500 CAPE).  Last month’s update can be found here.

Before we look at the CAPE let us first look at other key S&P 500 metrics:

• The S&P 500 Price is currently 1,430 which is 1.9% above last month’s Price of 1,403 and 21.8% above this time last year’s Price of 1,174.
• The S&P 500 Dividend Yield is currently 1.98%.
• The S&P As Reported Earnings (using a combination of actual and estimated earnings) are currently $88.59 for an Earnings Yield of 6.2%.
• The S&P 500 P/E Ratio is currently 16.1 which is up from last month’s 15.9.

The Retirement Investing Today High Yield Portfolio (HYP)

In its purest form a High Yield Portfolio (HYP) is a strategy designed to develop an Income Stream, which then provides an alternative to purchasing an Annuity with your Pension Fund or other investments.  The first priority is to amass 15-20 shares (minimise company risk), from different industries (minimise sector risk), from the FTSE 100 (minimise stability risk) that you believe will spin off dividends that rise at or above the rate of inflation.  If you achieve this then your purchasing power is maintained or increased.

If you achieve the first priority then you can also look to target the second priority which is to maximise the capital growth (what so many fund managers chase) of the portfolio.  This will ideally be an outperformance when compared to the UK market.  Although I think that if one can achieve the first priority there is every chance you will get the necessary amount of the second to meet your Income Stream objectives.